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Lords urge government to delay new LLP tax rules

Fears that HMRC may have reached 'point of no return' despite severe criticism by House of Lords economic affairs committee

12 March 2014

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HMRC should delay implementation of new LLP tax rules until April 2015, a parliamentary committee has said, urging the government to consult further before making any changes.

In a report published yesterday a House of Lords' economic affairs sub-committee recommended that HMRC gave businesses more time to adjust to the proposed new rules and that any new legislation should be properly targeted.

The new rules, contained in the draft Finance Bill 2014 and due to come into force on 6 April, would remove the presumption that an LLP member is a self-employed partner for tax purposes and replace it with a three-condition test based on profit sharing, management and capital.

Most of the evidence to the committee suggested that a better alternative would be to align the definition of 'partner' in tax law more closely with that used in employment law, which would extend the case law applicable to general partnerships to LLP member, including salaried partners.

"It is clear that there are alternative ways of achieving the policy outcome of aligning the tax treatment of LLP members with partners in a general partnership," the report said.

"One approach would be to remove the presumption of self-employment from the tax legislation and to rely on partnership case law to determine whether a LLP member is an employee or a self-employed partner. Another approach would be to adopt legislative tests designed to achieve the same outcome.

"In our view, it is still open to question which is the better approach. We agree strongly with those who stressed that, if legislative tests are adopted, it is vital that they achieve the intended policy outcome of aligning the tax treatment of members of LLPs with that of partners in a general partnership."

While accepting the need for the law to change, the committee called on the government to "address all the points made and amend those tests so that they place members of LLPs in the same position as partners in a general partnership."

George Bull, chair of the professional practices group at accountants Baker Tilly, which gave evidence to the committee, suggested the case law test used for general partnerships would be a better approach.

Bull said there was also a practical problem that, for many firms, the start date of April 2014 did not accord with their accounting periods and would take effect when the bill had not yet had its parliamentary scrutiny.

"HMRC have ignored this completely in the revised legislation," he said.

Bull added that HMRC may have reached "a point of no return" but said the Lords' support for the professions' concerns were welcome.

Additional concerns highlighted in the report include imprecise drafting in relation to mixed membership partnerships and the failure to address the position of non-UK registered LLPs conducting business in the UK.

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